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Signs of Optimism Amid Uncertainty: CFO Global Signals

Despite the global gyrations in recent months—particularly the Brexit vote in the U.K. and the U.S. presidential election, and ensuing uncertainty regarding global trade—there are multiple signs of optimism among CFOs, as reflected in the Q4 2016 edition of Global CFO Signalsfrom Deloitte Touche Tohmatsu Limited. The report reflects sentiment among CFOs surveyed in Australia, Belgium, Central Europe, Japan, Netherlands, North America, Russia, Switzerland and United Kingdom.

Ian Stewart

In fact, many of the CFOs surveyed voice positive outlooks about their financial prospects, key metrics, and in many cases, their countries’ economic outlooks. In the U.K., for example, the resilience of the economy after the Brexit vote has surveyed CFOs entering 2017 in better spirits than at any time in the last 18 months.

In North America, where the survey opened the day after the presidential election, net optimism rose from +19.7 in Q3 2016 to +23.4 in Q4 2016, despite overriding uncertainty about future government policy. And in Australia, where uncertainty is at record levels, the survey entered its fourth consecutive year of net positive optimism.

“The lesson here,” says Ian Stewart, chief economist, Deloitte UK, and a member of Deloitte’s Global Economists Network, is that “political shocks and upsets do not necessarily have huge economic effects.” Moreover, the geopolitical noise may actually be clouding certain success stories. In Europe, for example, where Mr. Stewart points to an evolving recovery, “perceptions are being skewed by politics.”

That does not mean surveyed CFOs have not taken notice of the major changes afoot. At the time of the survey, Australian CFOs responding to the survey were taking the U.S. election result in their stride, with 53% foreseeing a Trump presidency as having little-to-no impact on their companies in the short run, but 33% citing long-term risks. In the U.K., surveyed CFOs expect Brexit to negatively impact capital spending (35%), hiring (39%) and discretionary spending (51%) over the next three years. In addition, 27% of CFOs surveyed in Switzerland already cite commercial reforms and protectionism in other countries, including the United States, as having negative impacts on the financial success of their businesses.

Patricia Buckley

Still, surveyed CFOs seem to expect their companies to block out the noise and deliver solid results. In Central Europe, for example, 71% of the CFOs participating in the survey expect their company revenues to grow during 2017, 75% expect operating margins to improve or stay the same, and 42% expect their workforces to grow. In Japan, 69% of surveyed CFOs are forecasting increased earnings, and revenues are expected to tick up in Belgium (84%), the Netherlands (70%) and Switzerland (62%).

Such positive prospects are encouraging in a world with so many unknowns, particularly concerning trade and the future of globalization. “That is why it will be interesting to see the change in sentiment over time,” says Patricia Buckley, managing director, Economic Policy and Analysis, Deloitte Services LP, adding that one thing that is clear for CFOs is that “scenario planning has become much, much tougher.”

How does CFO sentiment in Q4 2016 break down? Following is a synopsis by region.

Sentiments by Region

Americas

All eyes were definitely on the new Trump administration in the fourth quarter. Yet, while North American CFOs responding to the survey voiced concern about the lack of clarity around government policy, 43% of them expressed rising optimism (up from 35% in Q3 2016), and 20% cited declining optimism (up from 16%). Their year-over-year operating expectations remain muted, but surveyed CFOs are firmly biased toward revenue growth and investing cash.

Andres Garza

Surveyed CFOs are also bullish toward economic growth in the U.S., but split on Canada’s prospects (only 14% of Canadian CFOs responding to the survey say Canada’s economy will improve), and negative toward Mexico’s (where 0% of Mexican CFOs respondents expect improvement in that economy).

As noted by Andres Garza, economic analysis leader with Deloitte Mexico, the strong levels of pessimism regarding Mexico’s economy may have been an initial reaction to the election—and subsequently spurred a more aggressive corporate stance. He points to recent spikes in Mexican export volumes to both the U.S. and the rest of the world, as well as an appreciation of the peso of around 6% since President Trump took office, saying it may reflect the realization that “if changes are made to trade policy, they will take time.”

Asia-Pacific

For the two countries reporting in Asia-Pacific—Australia and Japan—there are upbeat signs for the future. In Japan, for example, 27% of surveyed CFOs indicate that they are “somewhat positive” about their companies’ financial prospects, the highest level in that survey. As for plausible risk scenarios, though, most surveyed CFOs believe the Trump administration’s policies may impact diplomatic and trade arrangements and are concerned about the “clear signs of protectionism.”

Meanwhile, in Australia, where surveyed CFOs rank the current level of uncertainty the highest in the survey’s eight-year history, they are still strongly optimistic, buoyed by historically low interest rates and a lower Australian dollar, as well as by the shift of economic activity away from mining states in the north and west to retail and housing markets in the east. Barring unforeseen events, the economic outlook for 2017 is one of relative strength, with Australia poised to break the record—currently held by the Netherlands—and enter its 26th consecutive year of economic growth.

Europe

Finally, in Europe, the initial shock of Brexit seems to have worn off and left surveyed CFOs breathing a sigh of relief. In the U.K., the resiliency of the economy in the wake of the vote has left surveyed CFOs markedly more positive on the outlook for their own businesses—although 66% of CFOs respondents expect that leaving the EU will be negative for the overall business environment in the long-term. In Belgium, optimism is at positive levels last seen in 2014, and expansionary strategies are the top priority for 62% of companies.

For the seventh successive quarter, Swiss CFOs’ views of the country’s economic prospects have improved (50%), and 64% voice optimism about their companies’ financial prospects. Russian CFOs responding to the survey are also cautiously optimistic, with 36% reporting positive outlooks for their companies. And across Central Europe, surveyed CFOs have been emboldened by increasing GDP rates and lower unemployment.

Going forward, the Deloitte economists interviewed expect that there may be more geopolitical surprises in store. For CFOs and for companies, says Mr. Stewart, this necessitates “recognizing the risks and measuring them, but not to be completely driven by them.”

Other Findings

Risk appetite—Companies’ risk appetite further underscores surveyed CFOs’ improving optimism for some countries. In the Netherlands, some 40% of surveyed CFOs say now is a good time to take greater risk onto their balance sheet—a recovery of 800 basis points from the third quarter. Likewise, in Belgium, the percentage has improved to 39% from 23% in Q2 2016. But in the U.K., the impact of Brexit continues to weigh heavily, with only 21% of surveyed CFOs saying now is a good time to take on risk. Similarly, 54% of Australia’s CFOs who responded to the survey do not think it’s time to add risk, and neither do 65% of Central Europe’s CFOs.

Uncertainty—Despite the risks facing them, some CFO respondents see moderation with respect to uncertainty. In Switzerland, 58% of surveyed CFOs rate the level of external financial and economic uncertainty as high (down from 63% Q3), as do 51% of Russian CFO answering the survey (down from 72%), and 44% of Belgium’s CFOs (down from 50%). Uncertainty in Japan rose sharply, with the proportion of surveyed CFOs citing “high” or “very high” uncertainty rising to 80% from 56% in Q3, as did uncertainty in Australia, where 78% of CFO respondents put it between “above normal” and “very high”—a survey record.

Metrics—In North America, the fourth quarter’s 3.7% expectation for year-over-year revenue growth is down from the third quarter’s 4.2%, and near the survey low. Elsewhere, surveyed CFOs are more upbeat about revenue increases, particularly in Belgium (where 84% expect an increase), Central Europe (71%), the Netherlands (70%) and Switzerland (62%). In line with increased optimism, 69% of Japanese CFO responding to the survey expect an increase in earnings. Yet, in the U.K. where capital expenditure and discretionary spending expectations are up, on balance surveyed CFOs still expect to decrease spending.

Hiring—As for hiring, the outlook among the European companies reporting remains relatively positive. Forty-two percent of Central Europe’s CFO responding to the survey expect to hire over the next 12 months, as do 40% of surveyed CFOs in the Netherlands, 35% of Belgium’s CFOs, and 24% of Russia’s CFOs. Some 39% of the U.K.’s CFO responding to the survey think hiring will decrease because of Brexit, but that is down from 66% in Q2 right after the vote. In North America, however, the fourth quarter’s domestic hiring growth expectation fell to 1.3% from 2.3% in Q3 and is slightly below its two-year average.

Corporate strategy—Signs of expansion emerged in Q4. In line with growth ambitions and increases in capital expenditure, 62% of Belgium’s CFOs responding to the survey report their strategic priority is expansion rather than defensive strategies. In North America, about 45% of surveyed CFOs say they are biased toward revenue growth (one of the highest levels in survey history), while only 31% claim a bias toward cost reduction (one of the lowest). And 59% of surveyed CFOs across Central Europe expect M&A activity to increase. Yet, there is still plenty of caution. U.K. CFOs answering the survey entered 2017 focused on reducing costs (45%) and increasing cash flow (41%) as their top priorities, and in Russia, four of the top five strategies cited were defensive.

Funding/interest rates—Monetary policy remains accommodating, but surveyed CFOs expect interest rate hikes. Some 85% of Belgium’s CFOs responding to the survey expect the ECB to raise rates this year, which may be why 81% point to internal financing for growth. In Australia, 42% of CFOs believe that rates will rise in a year’s time (compared with 48% who thought they’d be lower in the Q3 survey), and in the U.K., 61% of surveyed CFOs believe the Bank of England’s base rate will be above its current level of 0.25% in a year’s time. Nearly 70% of their counterparts in North America expect interest rates to rise above 0.5% in 2017.

About the Report

The purpose of DTTL’s Global CFO Signals report is to provide highlights of recent CFO survey results from Deloitte member firms. This issue includes the results of the fourth-quarter 2016 CFO surveys from Deloitte member firms in the following geographies: Australia, Belgium, Central Europe, Japan, Netherlands, North America, Russia, Switzerland and United Kingdom. See the full Q4 2016 Global CFO Signals report for member firm contacts and information on the scope and survey demographics for each survey. Note, all numbers in the North American survey with asterisks are averages that have been adjusted to eliminate the effects of stark outliers.

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